Dog Up! Franks is looking at a new sausage system with an installed cost of $430
ID: 2754049 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $430,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $60,000. The sausage system will save the firm $260,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $19,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project?
Explanation / Answer
Statement showing Cash flows Particulars Time PVf@8% Amount PV Cash Outflows (Installed Cost) - 1.00 (430,000.00) (430,000.00) Cash Outflows (Working Capital) - 1.00 (19,000.00) (19,000.00) PV of Cash outflows (449,000.00) Cash inflows 1.00 0.9259 207,800.00 192,407.41 Cash inflows 2.00 0.8573 207,800.00 178,155.01 Cash inflows 3.00 0.7938 207,800.00 164,958.34 Cash inflows 4.00 0.7350 207,800.00 152,739.20 Cash inflows 5.00 0.6806 207,800.00 141,425.19 Cash inflows (Salvage Value) 5.00 0.6806 42,000.00 28,584.49 Cash inflows (Working Capital) 5.00 0.6806 19,000.00 12,931.08 PV of Cash Inflows 871,200.72 NPV 422,200.72 Savings in pretax operating costs 260,000.00 Savings net of tax (260,000*.7) 182,000.00 Salvage Value 60,000.00 Salvage Value net of tax = 60000*.70 42,000.00 Depreciation = 430,000/5 86,000.00 Tax Savings on depr = 86000*.30 25,800.00 Total Savings = 182,000 + 25,800 207,800.00
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